There are three broad categories of Mutual Funds- Equity, Debt & Hybrid Funds. Out of which, Equity Funds have the potential to give higher returns than the other two categories. Under Equity Mutual Funds, the pooled funds are allocated in the stocks/shares of companies across market capitalisations.
According to the Securities and Exchange Board of India (SEBI), Equity Mutual Funds invest at least 60% of the assets in different companies as per the investment stance. Equity Funds as a category are further divided according to the nature of investment and risks involved.
Here is a list of different types of Equity Mutual Funds available in the market:
Classification of Equity Mutual Funds
|Open-ended equity schemes investing in stocks/shares of large cap companies
|Mutual Fund schemes investing in stocks/shares of small cap companies
|Open-ended equity schemes investing in stocks/shares of companies across market capitalisation
|Open-ended equity schemes investing in equity and equity related instruments of mid cap companies
|Dividend Yield Fund
|Equity Mutual Funds primarily investing in corporations that have significantly high-dividend yielding stocks
|A Value Fund is a type of Mutual Fund which follows a value investing strategy
|Open-ended equity schemes which invest in a limited number of stocks (max. 30) from either of the market caps
|These are schemes which invest in equities and equity-related instruments of businesses that operate in a particular sector or industry
|It is an open-ended equity linked tax saving scheme with a lock-in period of 3 years
Related Article: Best Equity Mutual Funds for 2020
Classification on the basis of Market capitalisation
According to market capitalisation, Equity funds are divided into Large Cap, Small Cap, Mid-Cap and Multi Cap Funds. Here is an overview of these classifications:
1. Large Cap Mutual Funds
The company whose market capitalisation is more than or equal to 20 crores is known as a Large Cap Company (top 100 companies in terms of market capitalisation). Mutual Funds which invest a minimum 80% of the assets in the equity & equity-related instruments of Large cap companies are called Large Cap Funds.
Who should invest in Large Cap Funds:
- Investors who are willing to earn steady returns on their investments can invest in Large Cap Funds
- Small cap and Mid cap funds are comparatively more responsive to bearish market situations. Whereas, Large cap funds are capable of weathering it out because of the investments made in large companies which are already well-established in the market. These companies work under a sound business model and have a strong market presence which helps them during market downturns. Hence, conservative investors can invest in large cap funds to avoid investment risks
- New or first-time investors who are not familiar with market fundamentals can opt to invest their corpus in large cap funds and earn steady returns/
2. Small Cap Mutual Funds Funds
The companies ranked below 250 in terms of market capitalization are called Small Cap Companies. Mutual Funds investing at least 65% of the total assets in equity & equity related instruments of small cap companies are called Small Cap Funds. The remaining 35% of the assets can be invested in large cap, mid cap or small cap equities according to the investment stance.
Who should invest in Small Cap Funds:
- Investors who are willing to invest in startups with a solid business model can invest in Small cap Funds
- Small cap funds invest in the companies with emerging businesses and high growth potential. Because of their stringent investment stance, small cap funds are known for generating higher returns than large cap funds during bullish markets.
- If you are comfortable with investments in high risk schemes to earn higher returns, you can choose small cap funds. However, it is suggested that you remain invested for at least 5 to 7 years to earn satisfactory returns and beat market volatility
3. Mid Cap Mutual Funds
Companies falling between the 101st and 250th largest companies in terms of market capitalisation are called Mid Cap Companies. Mutual Funds investing a minimum of 65% of total assets in equity & equity-related instruments of mid cap companies are called Mid Cap Funds.
These funds maintain a balance between returns and risks with investments made in the stocks of companies which hold a considerable amount of stability.
Who should invest in Mid Cap Mutual Funds:
- Small cap funds are considered high risk because they invest in small size companies. But if you are looking for slightly lower risk, mid cap funds have the potential of outperforming its benchmark with an investment stance driven by growth & stability
- Mid cap stocks are known for delivering higher returns than large cap whilst being volatile on the stock market. Investors with moderate risk appetite can opt to invest in mid cap stocks
- If you have a long term investment goal (minimum 7 to 10 years), you can invest in mid cap funds
4. Multi Cap Mutual Funds
Mutual Funds which invest across market capitalisation are known as Multi Cap Funds. According to the SEBI, there must be a minimum of 65% investment in equity & equity related instruments. Using the opportunity of diversification, advancing flexibility and switching between the sectors as per portfolio requirements is in the hands of the fund managers.
During unfavourable times, the fund managers prefer investing in large cap stocks to maintain stability. On the other hand, during a bullish market, investments are majorly made in small cap and mid cap funds to generate higher returns.
Who should invest in Multi Cap Funds:
- Investors who are willing to use diversification as an investment strategy can invest in Multi Cap funds
- It is a good choice for new investors with low to no market knowledge. These funds offer flexibility of multiple capitalisation and saves the investors from picking up stocks from a particular capitalisation
- If you want to keep up with a constant balance between risk and returns, you can choose to invest in multi cap funds
Classification according to Tax Benefits
Equity-Linked Savings Scheme (ELSS) is a type of Equity Mutual Fund which not just serves the purpose of investment but also helps the investors save on income taxes. These schemes help in tax-saving as the investments up to Rs.1.5 lakh in ELSS are eligible for deduction from taxable income in a financial year. It comes with a statutory lock-in period of 3 years. ELSS is the only tax-saving mutual fund scheme which qualifies for tax deductions under Section 80(C) of Income Tax Act, 1961.
Who should invest in ELSS:
- Investors who are willing to keep their funds invested for at least 3 years (as it is the lock-in period in ELSS). Moreover, equity securities perform better in the long run
- ELSS gives the investors an opportunity to save on their taxes (if you are part of the old regime) with high capital growth.
- Investors with high-risk appetite and long-term wealth creation goal should invest in ELSS
- Each ELSS fund will have its own investment strategy in terms of market capitalisations, which you can check before investing
Classification according to Investment Strategy
Apart from categorisation according to the value and size of the companies, Equity Mutual Funds are also classified as per the investment strategy which has been employed. Let is have a look at the funds-
6. Thematic Funds or Sectoral Funds
Often confused with each other, Thematic and Sectoral Funds are two different types of Mutual Funds. Basically, Sectoral Funds are mutual funds which invest the assets in a particular sector such as infrastructure, pharmaceuticals, real estate, etc. On the other hand, Mutual Funds which invest in stocks of multiple sectors following a particular theme are called Thematic Funds; such as Trading, Consumption, Rural Development, etc.
Who should invest in Thematic or Sectoral Funds:
- Sectoral and Thematic Funds are considered to carry the most amount of risk especially during bearish markets, if an entire sector faces a downfall which is not favourable to conservative investors. If you are an investor with high risk appetite, you can invest in these funds
- Investors with efficient knowledge of fundamentals of market and skills to analyse the macroeconomic situations of multiple sectors can choose to invest in sectoral or thematic funds
- Investors with a minimum investment horizon of 3 to 5 years are suitable for sectoral/thematic funds
7. Focused Funds
There are mutual funds which are allowed to invest in a limited number of stocks. Such Mutual Funds are called Focused Funds. According to SEBI, the portfolio of a focused fund can have a maximum number of 30 stocks. The selection process of the stocks to be invested in, involves search for quality strategy and expert research at the hands of the fund managers.
Since investments can be made in a limited number of stocks, the focus is diligently applied on picking stocks with potential business plans and growth opportunities.
Who should invest in Focused Funds:
- Investors who are comfortable with investing in a concentrated portfolio can choose a focused fund for their investments
- Due to this highly concentrated investment strategy, focused funds are categorised under high risk mutual funds. Conservative investors cannot invest in focused funds
- Investors who are seeking long-term investments for at least 5 to 7 years should invest in these funds
8. Value Funds
Value investing is a contrarian investment strategy wherein the investments are made against the ongoing market trends. Under this strategy, the fund managers select the stocks which are currently underperforming with an assumption that these stocks will recover in the long run as and when the short-term concerns plaguing them are mitigated. The mutual funds following Value investing strategy are called Value Funds.
These are open ended equity schemes investing in the stocks which are currently underperforming, stocks with low P/E (Price to earning ratio) and stocks of companies which belong to emerging sectors.
Who should invest in Value Funds:
- Investors who are willing to invest in the underdeveloped industry or sectors and stocks of emerging companies with high growth potential
- Value Funds are not exactly suitable for new investors. The investors with preliminary knowledge of market trends and choose to take bets for higher returns can invest in Value Funds.
- Value funds may underperform during a bull market phase when there is downfall in the value stocks. Which implies that these are suitable for investors who are only willing to earn steady returns
9. Dividend Yield Funds
Dividend is that part of the profits earned by a company which is shared with its shareholders. The mutual fund schemes investing in the equity & equity related instruments of companies paying high dividends to its shareholders are called Dividend Yield Funds.
As per the regulations of SEBI, a dividend yield mutual fund must have at least 65% of total assets invested in dividend yielding stocks.
Read More: Best Dividend Yield Mutual Funds for 2020
Who should invest in Dividend Yield Funds:
- Investors who are interested in earning a regular income, even if it is comparatively low, can invest in dividend yield funds
- Such funds are suitable for risk-averse investors willing to go for better returns and avoid exposing themselves to market risks
- Investors with short-term financial requirements should invest in Dividend Yielding Funds
- Dividend Yield Funds are designed in such a way that they act as investments with minimal risk for a limited period. Thereby, new investors can choose to invest in these funds